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Investment Definition

The word investment can be defined in many ways according to different theories and principles. It is a
term that can be used in a number of contexts. However, the different meanings of “investment” are
more alike than dissimilar.

Generally, investment is the application of money or other assets in the hope that in the future it would
appreciate or generate more income.

According to economics, investment is the utilization of resources in order to increase income or

production output in the future. An amount deposited into a bank or machinery that is purchased in
anticipation of earning income in the long run are both examples of investments.

Although there is a general broad definition to the term investment, it carries slightly different meanings
for different industrial sectors.

Investment Definition: According to economists, investment refers to any physical or tangible asset, for
example, a building or machinery and equipment.

On the other hand, finance professionals define an investment as money utilized for buying financial
assets, for example stocks, bonds, bullion, real properties, and precious items.

According to finance, the practice of investment refers to the buying of a financial product or any valued
item with the anticipation that positive returns will be received in the future.

The most important feature of financial investments is that they carry high market liquidity. The method
used for evaluating the value of a financial investment is known as valuation.
Business theories define investment as that activity in which a manufacturer buys a physical asset, for
example, stock or production equipment, in expectation that this will help the business to prosper in the
long run.

Definition of Investment for students

Investment for students is an ideal way to overcome the spiraling cost of education. Parents every year
deposit a certain amount of money in banks for their child in the anticipation that it would appreciate in
the future and would help their child in pursuing his or her chosen field of education.

Medical Definition of Investment

Disease can strike any time without warning and the cost of treatment can, at times, be very expensive.
Medical definition of investment is when a person invests money in banks or insurance schemes so that
in case of any health-related problems he or she would have enough money to afford expensive
treatment.

Legal Definition of Investment

In the legal sense, investment is the outlay of money that is mainly for income or profit. It is also the
property purchased or the sum invested.

Investment Strategy

Investment strategy is actually the plan, which is followed by an investor to make profits and to achieve
financial stability. Based on this investment strategy the investor identifies the areas where the money
can be invested safely. At the same time the returns from that money is also of equal importance.

The investment planning also helps the investor to reduce the risk factor from the investment portfolio.
Now several investment options are available in the market. There are thousands of people who are
making money from these options. Again, there are also a large number of investors who are facing
losses everyday.

This means that if the investment is done in a proper manner, the profit can be made from every
possible medium otherwise the result may be the opposite. But to make the investment successful, an
investor needs to do the homework properly. He or she needs to follow that market closely in which he
or she wants to invest.
There are several sources like the financial market news, several journals, internet and many more that
can provide vital information about the financial market. These information are very important to form a
strategy.

At the same time, the financial planners can also provide assistance to form an investment strategy,
which suits the need of the investor.

Before planning a strategy for investment, one needs to be sure about the aim of his or her investment.
One needs to decide about the desired returns and more importantly the amount of risk that he or she
can bear. These factors are going to decide the suitable medium of investment for the investor.

The investment medium may be anything, the investment portfolio of the investor should be diversified.
Investing in one single medium may increase the amount of risk. In multi-investment, the risks related to
one medium are covered through another one.

The two basic investment choices are the stock market and the bond market. The stock market is full of
different types of shares and options. All these shares are different from each other in many aspects like
the amount of risk and the pace of growth. Now, the investor needs to follow a certain strategy to invest
in this market. The investor needs to choose some specific shares in which the money would be invested.
At the same time, the investor should also buy some options to minimize the amount of risk involved in
the shares. The bond market is not so complicated and so the strategies are very simple.

Essential of Investment

Essentials of investment refers to why investment, or the need for investment, is required. The
investment strategy is a plan, which is created to guide an investor to choose the most appropriate
investment portfolio that will help him achieve his financial goals within a particular period of time.

An investment strategy usually involves a set of methods, rules, and regulations, and is designed
according to the exchange or compromise of the investor’s risks and returns. A number of investors like
to increase their earnings through high-risk investments, whilst others prefer investing in assets with
minimum risk involved.
However, the majority of investors choose an investment strategy that lies in the middle.

Investment strategies can be broadly categorized into the following types:

Active strategies: One of the principal active strategies is market timing (an investor is able to move into
the market when it is on the low and sell the stocks when the market is on the high), which is applied for
maximizing yields.

Passive strategies: Frequently implemented for reducing transaction costs.

One of the most popular strategies is the buy and hold, which is basically a long term investment plan.
The idea behind this is that stock markets yield a commendable rate of return in spite of stages of
fluctuation or downfall. Indexing is a strictly passive variable of the buy and hold strategy and, in this
case, an investor purchases a limited number of every share existing in the stock market index, for
example the Standard and Poor 500 Index, or more probably in an index fund, which is a form of a
mutual fund.

Additionally, as the market timing strategy is not applicable for small-scale investors, it is advisable to
apply the buy and hold strategy. In case of real estate investment the retail and small-scale investors
apply the buy and hold strategy, because the holding period is normally equal to the total span of the
mortgage loan.

Foreign Institutional Investment

The term foreign institutional investment denotes all those investors or investment companies that are
not located within the territory of the country in which they are investing. These are actually the
outsiders in the financial markets of the particular company. Foreign institutional investment is a
common term in the financial sector of India.

The type of institutions that are involved in the foreign institutional investment are as follows:

Mutual Funds

Hedge Funds

Pension Funds
Insurance Companie

The economies like India, which are growing very rapidly, are becoming hot favorite investment
destinations for the foreign institutional investors. These markets have the potential to grow in the near
future .

This is the prime reason behind the growing interests of the foreign investors. The promise of rapid
growth of the investable fund is tempting the investors and so they are coming in huge numbers to these
countries.

The money, which is coming through the foreign institutional investment is referred as ‘hot money’
because the money can be taken out from the market at anytime by these investors.

The foreign investment market was not so developed in the past. But once the globalization took the
whole world in its grip, the diversified global market became united. Because of this the investment
sector became very strong and at the same time allowed the foreigners to enter the national financial
market.

At the same time the developing countries understood the value of foreign investment and allowed the
foreign direct investment and foreign institutional investment in their financial markets. Although the
foreign direct investments are long term investments but the foreign institutional investments are
unpredictable. The Securities and Exchange Board of India looks after the foriegn institutional
investments in India. SEBI has imposed several rules and regulations on these investments.

Some important facts about the foreign institutional investment:

The number of registered foreign institutional investors on June 2007 has reached 1042 from 813 in
2006

US $6 billion has been invested in equities by these investors

The total amount of these investments in the Indian financial market till June 2007 has been estimated
at US $53.06 billion

The foreign institutional investors are preferring the construction sector, banking sector and the IT
companies for the investments

Most active foreign institutional investors in India are HSBC, Merrill Lynch, Citigroup, CLSA
Best Investment

The best investment options depend on the particular investor. Two people cannot be the same and so,
the definition of this ‘best’ is bound to vary from investor to investor. At the same time, the market
conditions are also responsible for making an investment option good or bad. There are several factors,
which are related to the definition of bet investment plan.

These are:

Safety

Return

Liquidity

The safety of the investment is the basic factor for investing money. There are several types of risks,
which are included in an investment. The prime risk is of facing huge loss. On the other hand the slow
paced growth of the investment is also a matter of concern for the investors. So, the best investment
should cover these factors.

Return is another matter of concern for the investors. There are several investment mediums, which
promises low but safe return. On the other hand, the high yielding mediums are related to the high level
of risk.

Now this depends solely on the investor to identify the best investment option according to his or her
mental set up. At the same time, the availability of the invested money at time of emergencies is also
very important from the investors’ perspective.

The best investment options should have this flexibility that it can allow the investor to draw back cash
when there is any kind of emergency.

Everybody wants to save some amount of money from the taxes. Now if the investments can do this for
them, then it is surely going to be a lucrative option for them. It can also be considered as the best
option if it can provide the above discussed factors with the tax relief.
According to all these factors, mutual funds can be considered for this category, because the mutual
funds are highly safe options. The mutual funds assure a specific amount as return. Though the amount
of return is low compared to the stock trading returns, but the amount of risk is also low.

There are several other plans, which provide the investor with tax relief. Because of this feature the
403(b) plan is very popular in the US. Investments through this plan can save some good amount of
money from the investors’ payable tax.

The investments can be made through the discount brokers to save a good amount of money. Another
way of making best investment is to use the individual retirement account or the automatic investment
plan. The initial costs of investment are very low in these cases, which can make the investment look
better.

Foreign Direct Investment (FDI)

Foreign direct investment or FDI is becoming a boon for the developing countries. The term represents
the possession of assets by any foreign company. The assets may be any company , factory, mines and
many more. In the recent years the foreign direct investment has grown manyfold.

The prime reason behind this is the globalization. The diversified global market has emerged as a
lucrative option for investment. In such a situation, inflow of foreign funds is quite natural. In the past
the foreign direct investment were limited to the highly industrialized countries and the developing
countries were not preferred by the foreign giants.

But at present, the trend has changed totally and the developing economies are preferred highly for
foreign direct investment. There are several reasons for this.

These are:

Availability of raw material

Availability of cheap labor

Cheap production Cost

Ready market
Legal facilities in such countries

On the other hand, the developing countries are also getting some facilities from foreign direct
investment. Foreign aid proves to be of great use for the infrastructural development of the developing
countries. These initiatives are also providing ample scope of employment, which is the major problem
in all developing nations.

The scenario of FDI (Foreign direct investment) was totally different in 1970’s. At that time, the
developing countries were out of the picture. But the picture has totally changed in 1990s. It was
because the countries followed the method of privatization. More than 71% of the total foreign direct
investment in 1997 which was forwarded towards the developing countries, was shared by nine
countries. China alone received 30% from the above mentioned FDI.

The main countries or continent, which are highly benefited by the FDI in the recent years are:

Africa

Asia

Latin America

North America

Parts of Europe

Many countries became independent in the post-war period and these countries were not ready to
accept any type of foreign investment any more. For the reason, the concept of nationalization
dominated the period. But gradually these countries understood that the obligations on the respective
governments were becoming too much. So, the privatization concept was again adopted by these
countries and this initiative allowed the FDI boom. This boom has not only caused the economic
development in those countries, but also helped in technological advancement and employment.

Investment Planning

The basic idea behind any form of investment planning is to maximize future financial returns for future
security. In formulating a financial plan, an individual investor must carefully consider his or her choices
before making any decision. Investment planning involves considering many possible financial options
that could be used to secure the desired financial future.

Often groups of individuals get together for the purpose of investment planning. Investment plans
require careful scrutiny of the financial market. It is mostly the responsibility of the particular firm to
make the decision on the matter of management of money, which could be utilized in meeting long term
asset investment plans or for gathering working capital.

An integral part of financial planning is the system a particular investor uses to decide how much and in
what ways to invest. Another important task is to ascertain the source from where the money could be
obtained.

Yet another important aspect of investment planning is analyzing the development and performance of
investments in a particular span of time. This could help the investor by cutting down on the amount of
uncertainty involved in the process. Investment planning also helps investors in channeling their funds in
the right direction.

An important reason for investment planning is planning for retirement. Investment calculators have
proven to be a useful tool in helping people plan in advance for their retirement.

Return On Investment (ROI)

Return on investment or ROI refers to how money can be received from investments. It is represented as
a ratio of money earned or suffered as a loss in an investment in association to the invested amount of
money. The money, which is earned, is known as profit, interest, net income or gain. The money lost is
known as loss.

The return on investment (ROI) is normally expressed as a percentage. The amount of money that is
invested is termed as capital, asset or principal. Return can either be positive or negative, which means
return can either mean a profit or loss. Return on investment can be calculated on previous or present
investment and it is also applied for calculating the estimated rate of return of future investment.

The Return on Investment Formula (ROI):

Return on investment (ROI) is frequently used on an annualized or yearly basis. Return on investment is
implemented for the comparison between the returns, which are expected to yield on investments, if
the comparison cannot be performed conveniently with the help of monetary values. Return on
investment is also known in a number of names, for example the rate of return (ROR), rate of profit or
simply return.

The ROI measures the ability of a particular company to utilize its assets for the purpose of generation of
extra value for the shareholders. ROI is estimated as Net Profit/Net Worth.

This valuation method is frequently used in accounting processes.

The return on investment ROI can be improved in the following ways:

By decreasing expenses

By increasing profits

By speeding growth

The different formulas for calculating the ROI are the following:

Return on investment is equal to gain from investment minus cost of investment divided by cost of
investment. In this case, the cost of investment is deducted from the gain from investment and then it is
divided by the cost of investment. The result is represented as a ratio or percentage.

ROI= Net Income/Book Value of Assets

Or, ROI= Net Income + Interest (1-Tax Rate)/Book Value of Assets

Return on investment or ROI is a highly popular measurement due to its convenience.

The factors on which the ROI depends for its amplification are the following:
The term of the project (the bigger, the more the increase)

The rate of depreciation

Capitalization policy

The time lag between the disbursement of money and the recovery of money (the more the time lag,
the more the increase)

The rate of appreciation of investment

Investment Strategy

Investment strategy is actually the plan, which is followed by an investor to make profits and to achieve
financial stability. Based on this investment strategy the investor identifies the areas where the money
can be invested safely. At the same time the returns from that money is also of equal importance.

The investment strategy also helps the investor to reduce the risk factor from the investment portfolio.
Now several investment options are available in the market. There are thousands of people who are
making money from these options. Again, there are also a large number of investors who are facing
losses everyday.

This means that if the investment is done in a proper manner, the profit can be made from every
possible medium otherwise the result may be the opposite. But to make the investment successful, an
investor needs to do the homework properly. He or she needs to follow that market closely in which he
or she wants to invest.

There are several sources like the financial market news, several journals, internet and many more that
can provide vital information about the financial market. These information are very important to form a
strategy. At the same time, the financial planners can also provide assistance to form an investment
strategy, which suits the need of the investor.

Before planning a strategy for investment, one needs to be sure about the aim of his or her investment.
One needs to decide about the desired returns and more importantly the amount of risk that he or she
can bear. These factors are going to decide the suitable medium of investment for the investor.
The investment medium may be anything, the investment portfolio of the investor should be diversified.
Investing in one single medium may increase the amount of risk. In multi-investment, the risks related to
one medium are covered through another one.

The two basic investment choices are the stock market and the bond market. The stock market is full of
different types of shares and options. All these shares are different from each other in many aspects like
the amount of risk and the pace of growth. Now, the investor needs to follow a certain investment
strategy to invest in this market. The investor needs to choose some specific shares in which the money
would be invested. At the same time, the investor should also buy some options to minimize the amount
of risk involved in the shares. The bond market is not so complicated and so the strategies are very
simple.